If you’re thinking about putting some money aside each month to save for your retirement, then you’re making a very smart decision. In fact, you should attempt to start doing this as early as possible. While attempting to figure out exactly how much you are likely to retire on is challenging, it’s always worth getting a rough idea.
You can use our retirement calculator to ascertain how much you can save based on a number of factors, such as your age, the amount you plan to save each month, and the current tax breaks available.
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What to consider when using the Retirement calculator?
Trying to work out how much you are going to retire on is a lot more difficult than simply calculating returns on an investment. The reason for this is that there so much to factor in. Before entering your details into the retirement calculator, make sure that you consider the following.
Current Age and Retirement Age
By entering the age that you plan to start saving for your Golden Years, as well as the age that you plan to retire, it will allow you to estimate how long you’ll be saving for. The key challenge here is that it is challenging to know what age you are likely to retire. While many of us get to choose when we stop work, your personal circumstances later on in life might not allow that. Try to be as realistic as possible.
Current and regular retirement savings
You will first need to consider how much you currently hold in retirement savings. This is a lump sum that you already have saved in a retirement-based account. After that, you then need to think about how much you are likely to set aside each month for your retirement account. Once again, nobody can predict the future, so try to be as accurate as possible.
Current and expected future earnings
It is important that you enter your current salary into the calculator, as this has a direct link to the tax savings you can make when injecting regular investments. Moreover, if you’re at the infancy of your working career, then its likely that your income will increase over time. Try to estimate at what rate you expect your income to increase each year and enter it into the retirement calculator.
Expected Tax Benefits
As you will be making tax-efficient savings on your retirement account, the current rates on offer should also be considered. However, this is likely to change over the course of time, so it’s best to just enter the current rate, rather than trying to predict what this will change to in the future. You should assess what tax rate you will need to pay when you eventually access your retirement savings.
Glossary of Retirement Terms
The Individual Retirement Arrangement (IRA) is a tax-advantaged investment account specially designed to help you save for retirement. There are different types of IRAs including traditional IRA, Roth IRA, and SEP IRA and they have their primary difference in the treatment of tax.
Roth IRA is a tax-advantaged retirement savings/investment account. It differs from traditional IRA in the sense that contributions into the Roth account are taxed but future incomes from savings or Roth IRA investments are tax-free.
A Traditional IRA is a tax-advantaged savings/investment account suitable for individuals looking to reduce their tax bill today. Contributions into a traditional IRA are tax-exempt but future earnings from the utilization of the IRA funds are taxable.
A Simplified Employee Pension IRA is a traditional IRA alternative offered by businesses to their managers and employees. It is a tax-deferred savings/investment account implying that contributions to the account are tax-exempt but future earnings are considered taxable incomes. They have higher contribution limits compared to traditional IRA and one can contribute a maximum of $57,000 into a SEP-IRA for the year 2020.
401K is an employer-sponsored retirement savings plan that lets employees save and invest a portion of their income in readiness for retirement. It’s a tax-deferred plan implying that contributions are tax-exempt. For every dollar you invest, the employer matches it with an equal contribution and you can contribute up to 3% of your income.
403(b) is a retirement plan that’s specially designed to cater for employees in public schools and universities and other not-for-profit organizations like hospitals and religious groups. One can deposit up to $16,500 per annum into the 403(b) plan. The primary difference between the 401k and 403(b) is that the latter carries less administrative costs.
Rollover IRA is a special account set up to help you move your employer-sponsored retirement plan into an individual IRA without incurring withdrawal fees and taxes. Ordinarily, moving funds from an old IRA to a new one is considered a withdrawal and attracts penalties and current taxes. The IRA rollover helps you maintain the tax-deferred status and avoid penalties when switching IRA plans.
SIMPLE IRA is a special type of employer-sponsored retirement plan designed for use by small businesses with less than 100 employees. The SIMPLE IRA carries fewer administrative costs and is generally less expensive than the 401K plan.
An annuity is an insurance or investment plan that pays you a regular fixed income at different intervals (monthly, quarterly, annually) for the rest of your life. A good retirement plan, for instance, should be enough to buy you an annuity that gets you sufficient and steady monthly incomes for the rest of your life.
Equity release is the form of surrendering the equity/value of a capital asset (usually your home) to a financier in exchange for a lump sum cash advance or a steady stream of income. You, however, get to retain the utilization of the home with the financier claiming it upon your death.